Matador Resources Company — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed March 1, 2017. Matador is an independent U.S. oil and natural gas exploration and production company, with midstream operations. Its principal focus is the Wolfcamp and Bone Spring plays in the Delaware Basin.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and natural gas revenue | $291.2 million | $278.3 million |
| Total revenue, including derivative results | $264.4 million | $318.0 million |
| Net loss attributable to Matador shareholders | $97.4 million; $1.07 diluted loss per share | $679.8 million; $8.34 diluted loss per share |
| Adjusted EBITDA (non-GAAP) | $157.9 million | $223.2 million |
| Net cash from operating activities | $134.1 million | $208.5 million |
| Net cash used in investing activities | $405.6 million | $425.2 million |
| Net cash from financing activities | $467.7 million | $224.9 million |
| Oil-equivalent production | 10.18 million BOE; 27,813 BOE/day | 9.11 million BOE; 24,955 BOE/day |
| Year-end proved reserves | 105.8 million BOE | 85.1 million BOE |
Average realized prices before derivative settlements were $41.19 per barrel of oil and $2.66 per Mcf of natural gas, compared with $45.27 and $2.71, respectively, in 2015. Lease operating expense declined to $5.52 per BOE from $6.01; production taxes, transportation and processing increased to $4.23 per BOE from $3.91. DD&A was $11.99 per BOE versus $19.63. The filing does not provide a single comparable operating-margin percentage.
At year-end, cash was $212.9 million, restricted cash $1.3 million, current assets $279.2 million and current liabilities $169.5 million. Senior notes totaled $575.0 million principal, bearing 6.875% and due 2023; the company had no credit-agreement borrowings and $0.8 million of letters of credit. Its $400 million borrowing base was undrawn, apart from those letters of credit. The credit agreement requires a debt-to-EBITDA ratio of 4.25 or less.
Material changes and notable items
- Production grew 12%, led by Delaware Basin output, which increased about 145% to 15,941 BOE/day. Eagle Ford production declined 52%; Matador did not operate new drilling and completion activity in the Eagle Ford or Haynesville during 2016.
- Proved reserves increased 24%, with 41.99 million BOE added through extensions and discoveries. About 75% of year-end proved reserves were in the Delaware Basin; 59% of proved reserves were undeveloped. Price-related revisions reduced reserves by 11.19 million BOE.
- Oil and gas revenue rose 5% on higher volumes, but operating cash flow fell 36%, principally because realized derivative gains dropped to $9.3 million from $77.1 million. Adjusted EBITDA also declined, partly for this reason.
- Matador recorded a $158.6 million noncash full-cost impairment in the first half of 2016, following an $801.2 million impairment in 2015. It also recognized a $107.3 million gain after EnLink’s replacement processing plant ended the sale-leaseback accounting treatment for the Loving County assets. The 2016 fourth-quarter net income attributable to shareholders was $104.2 million, substantially affected by this gain; it is not representative of recurring operating earnings.
- Two 2016 equity offerings raised approximately $287.3 million net, and a December notes offering raised approximately $181.5 million net including the issue premium. The borrowing base increased from $300 million to $400 million. These transactions funded investment and acquisitions and helped leave the revolver undrawn at year-end.
Outlook, risks and contingencies
Management’s 2017 budget called for $370–$390 million of drilling, completion, facilities and infrastructure spending, plus $56–$64 million for Matador’s 51% share of San Mateo midstream capital expenditures. The Delaware Basin was to receive substantially all planned spending. Management planned four rigs in the first quarter and a fifth beginning in the second quarter. The filing gives no specific 2017 production or earnings guidance.
In February 2017, Matador formed San Mateo with Five Point, contributing Delaware Midstream Assets and retaining 51% ownership and operational control. Matador received a $171.5 million distribution and may earn up to $73.5 million in performance incentives over five years. The joint venture and its expansion plans are subsequent events, not year-end 2016 results. Separately, Matador spent about $111 million after year-end to acquire acreage and related production.
Key risks include volatile commodity prices, reserve and well-performance uncertainty, reliance on continued access to capital, borrowing-base redeterminations and debt covenants, concentrated Delaware Basin operations, transportation and processing capacity, service-cost inflation, and environmental, hydraulic-fracturing, water-disposal and regulatory exposure. Long-term gathering, processing and disposal agreements include minimum-volume commitments; the new San Mateo operational agreements had an initial minimum contractual obligation of approximately $273.5 million. Drilling-rig contracts carried approximately $46.3 million of potential termination obligations at year-end, and non-operated drilling commitments were approximately $11.1 million. Management said ordinary-course lawsuits were not expected to have a material adverse impact. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Delaware Basin well productivity, production growth and reserve additions support the planned 2017 drilling program and spending.
- How commodity prices, basis differentials and hedge settlements affect realized prices, cash flow and borrowing capacity; 2017 oil and gas hedges covered about 70% and 50% of estimated production, respectively, as of February 22, 2017.
- Whether the $107.3 million asset-sale gain and noncash impairment effects are clearly separated from recurring performance when assessing earnings.
- Whether cash flow, available revolver capacity and San Mateo proceeds can support capital spending, minimum-volume commitments and debt service without additional equity or debt issuance.
- Whether reserve estimates and the 2017 acreage acquisitions translate into economic developed reserves, and whether lease expirations or infrastructure constraints impede development.